Hospitality Budget Guide: Part 3 Build the Costs
In Part 2 of the Hospitality Budget Guide, we built the revenue budget.
Now it is time to add the costs underneath it.
Some costs should move with revenue. Others should be built from historical actuals and adjusted for known changes. Treating every cost the same may create a neat spreadsheet, but not a useful hospitality budget.
Budget COGS by Revenue Category
Cost of goods sold, or COGS, should be matched to the revenue category that creates it.
Food COGS should be calculated from food revenue. Beverage COGS should be calculated from beverage revenue. Retail liquor, functions and other direct sales may need their own assumptions.
If food revenue is budgeted at $100,000 and the food COGS target is 30 per cent, the food cost budget is $30,000. If food revenue falls to $80,000, budgeted food cost falls to $24,000.
The percentage stays consistent. The dollar amount moves with revenue.
Start with your venue’s recent actual percentage, then decide whether it should change. A lower target may be reasonable after reviewing pricing, supplier costs, portion control or menu mix. It should not be reduced simply because the budget needs a better result.
Different revenue categories should also have different targets. One COGS percentage across the whole venue can hide what is happening in individual departments.
Admyn’s free hospitality GP calculators can help test sell prices and product margins when reviewing these assumptions.
Check the Gross Profit Result
Once COGS is added, the budget will show gross profit: the amount left to cover wages, operating expenses and profit.
If gross profit is too low, review the assumptions underneath it. Have supplier costs increased? Are prices still supporting the target? Is the sales mix changing?
Do not wait until the end of the budget to discover that the margin does not work.
Build the Wage Budget by Department
Wages should be linked to revenue, but not budgeted as one flat number across the venue.
Group wages into the areas that reflect how the business operates, such as kitchen, front of house, management, gaming or accommodation.
Set a monthly budget for each area based on expected trade, opening hours, award rates, minimum coverage and the team needed to deliver the revenue target.
Some departments will move more closely with revenue than others. Front-of-house wages may change with service volumes and functions, while the kitchen or management team may require more stable coverage.
Once each department is budgeted, combine the totals and compare them with overall venue revenue.
If revenue is $200,000 and total wages are $64,000, the overall wage percentage is 32 per cent.
This gives you two checks:
Does each department have enough labour to operate properly?
Does the total sit within an acceptable overall wage percentage?
If the percentage is too high, review the departmental assumptions, roster structure, trading hours and revenue target rather than cutting every area equally.
Build Fixed and Operating Costs From Actuals
Use the last 12 months of actual expenses as the base for rent, insurance, subscriptions, licences, accounting fees, equipment finance, contracts and other regular costs.
Keep the timing visible. Annual insurance should sit in the month it is due. Quarterly licences should remain quarterly. Seasonal utilities, repairs or marketing should reflect when they are likely to occur.
Some operating costs are not completely fixed. Electricity, merchant fees, linen, cleaning and delivery platform charges may move with trade. Use your history to decide whether each line should remain fixed, move with revenue or use a mix of both.
Consistent coding and reporting through your hospitality bookkeeping make this part of the budget easier to build and review.
Add Known Changes
Historical actuals are the starting point, not the final answer.
Adjust the relevant months for rent or insurance increases, new subscriptions, equipment finance, repairs, renovations, marketing campaigns or changes to trading hours.
If equipment finance begins in August, add it from August. If insurance renews in October at a higher premium, update October rather than spreading the increase across the year.
Record each assumption so you can later see why the budget changed and whether the decision delivered the expected result.
Review and Test the Result
Once revenue, COGS, wages and operating costs are included, review each month and the full year.
Are weak months visible? Are the GP and wage targets achievable? Have known increases been included? Does the budget produce an acceptable result?
If it does not, test the assumptions behind pricing, sales mix, wages, supplier costs, trading hours and planned spending. Revisit the revenue target if it is doing too much of the work.
That is the purpose of a budget: to test the options before the year unfolds.
A Budget Is a Working Plan
A hospitality budget does not need to predict every dollar perfectly. It needs to provide a realistic operating plan.
Start with revenue. Link COGS and wages to the sales that drive them. Build fixed costs from actual history. Add known changes in the months they will happen. Then compare actual results against the budget throughout the year.
This completes Admyn’s three-part Hospitality Budget Guide:
Part 3: Build the Cost Side
For help building a practical venue budget, setting GP and wage targets or improving monthly reporting, explore Admyn’s fractional CFO and COO services.
Book a free consultation with Admyn today.